Over at least the past three years Ethiopia’s foreign currency deficit has led to a thriving black market exchange, fuelling already-problematic illicit financial flows in the country. The black market limits the inflow and facilitates the outflow of legitimate foreign currency to and from Ethiopia.
There are many unregulated foreign currency exchange bureaus in the country, many of which are located in Addis Ababa. The black marketeers use small shops, usually set up for lawful businesses like boutiques, from where they signal to or directly ask passers-by for any foreign exchange. On the black market, a United States (US) dollar is worth double the official bank rate, which on 20 March 2023 was 53.8 Ethiopian birr (ETB). At its peak, in September 2022, US$1 bought nearly 120 ETB on the black market.
Another common way of diverting foreign currency is through illegal hawala. Hawala is a form of informal money transfer outside the banking system whereby Ethiopians in the diaspora remit foreign currency to middlemen, who pay the chosen beneficiary in Ethiopia in local currency at the black market rate.
In facilitating the outflow of Ethiopia’s much-needed foreign currency, black marketeers either smuggle out the foreign currency collected in Addis Ababa through Bole International Airport, or transport the funds to Moyale and Togochale, Ethiopian towns on the border with Kenya and Somalia. This is according to a researcher who spoke to ENACT on condition of anonymity.
Some of the foreign currency smuggled out through these border towns re-enters Ethiopia only to be traded and smuggled out again. Illicit traders approach bank officers in the border towns with an offer to sell, or vice versa, a former federal prosecutor told ENACT.
Banks in Moyale and Togochale purchase and process the foreign currency and disguise it as legitimately earned income that Ethiopian businesses have collected from exporting legitimate goods. In explaining this modus operandi, a researcher stated that banks in border towns work in collaboration with their head offices in Addis Ababa, where an individual who will buy the re-entered foreign currency for a higher price has already been identified.
The role of the banks on the black market is not limited to the border areas, according to the former governor of the National Bank of Ethiopia (NBE), Yinager Dessie. In Addis Ababa, banks pay black marketeers 30 ETB commission for a US dollar. They then use back-office deals to sell the foreign currency at a rate higher than even the black market. Finding a higher bidder is not a challenge. Corrupt individuals are willing to launder ETB by paying more for hard currency. Importers’ demand for forex is also significantly higher than the supply.
Ethiopia’s foreign currency shortage is exacerbated by ongoing instability. Massive government spending on the war resulted in a foreign exchange reserve outflow of US$307 million during the 2020/21 fiscal year. The war obstructed foreign currency inflow by limiting tourism and foreign direct investment. It also affected Ethiopia’s access to hard currencies by triggering unilateral economic sanctions by the West and the suspension of aid and international loans, which are still in force.
The continued absence of peace and stability, together with severe drought, have diverted government resources and attention to the more pressing concerns of restoring peace and stability, creating an environment where the black market can thrive. Other contributing factors include skyrocketing inflation, the global economic shock following COVID-19, and the Ukraine war.
The NBE has been trying to manage the shortage of foreign currency by putting in place several rules and regulations. Ethiopians travelling abroad can take with them no more than US$4 000 from their foreign currency account, for which proof of travel is required. As per Foreign Currency Management Rule 70-20-10, international traders can spend only 20% of the foreign currency they bring to Ethiopia – 70% goes to the NBE and 10% to the commercial banks.
In April 2022, the NBE tried to mitigate inflation by introducing ‘Franco-Valuta’ – the privilege of importing essential food commodities without needing to go through the banking system to acquire or spend the required foreign currency. However, this turned the black market into a significant source of forex for Franco-Valuta importers. The ETB lost ground fast – a US dollar overshot from under 65 ETB to over 80 ETB in less than a week. The NBE has revised the scheme to require importers to prove they use legally acquired foreign currency.
In May 2022, the NBE suspended commercial banks from providing forex-related services in Moyale and Togochale. In August, the Ethiopian National Intelligence and Security Service (NISS) reported the arrest of several Ethiopian and foreign nationals allegedly involved in illicit financial flows and illegal hawala.
In October 2022, the NBE and NISS froze 1 054 bank accounts over black market exchange and illegal hawala. In that same month, Ethiopia banned the import of several goods deemed non-essential and stopped issuing Letters of Credit for 38 products, from cigarettes and whiskeys to non-electric cars imported by private individuals.
Ethiopia may need to rethink its current approach, which focuses heavily on controlling the black market. Rather than intermittent efforts aimed at putting out fires, control efforts should be pursued using a consistent strategy. Last October’s establishment of a dedicated task force is a useful start, as it involves both regulatory bodies and law enforcement agencies. This should be complemented by a holistic government approach that includes establishing robust inter-agency coordination and cross-border cooperation.
Even this though, is unlikely to address the key issue which is that many Ethiopians believe that it is the black market exchange rate that reflects the true state of the economy, rather than the official exchange rate, interviewees who preferred anonymity told ENACT.
An option then is that the government could consider legalising black market exchange and transforming it into a parallel market that the NBE can regulate. If legalised, black market transactions could be recorded, taxed and used to support international trade.
However, an expert suggested to ENACT that legalisation might presuppose adopting a floating exchange rate, which can work best with a system that maintains a sustainable source of foreign currency. This would likely result in considerable devaluation of the currency, a result the government seems unwilling to accept.
So, the Ethiopian government faces difficult choices but it is clear that a choice needs to be made to limit the impact of the black market exchange and improve its foreign currency reserves.
Tadesse Simie Metekia, Senior Researcher, Horn of Africa, ENACT Project, Addis Ababa and Messay Asgedom Gobena, Assistant Professor, Ethiopian Policy University, Ethiopia
